Tapping TABOR: Colorado lawmakers turn to surplus dollars to fund tax credits

With the state's spending plan completed and on its way to the governor, along with funding for K-12 education, lawmakers are turning their attention in the final weeks of the legislative session to tax credits and bills totaling billions of dollars that will likely tap into the Taxpayer’s Bill of Rights surplus.

And tapping TABOR directly affects how much in refunds taxpayers would get not just in the next fiscal year but also in the foreseeable future. Colorado voters have zealously guarded that refund mechanism, rejecting measures that would redirect significant amounts to state programs, while approving some with limited spending figures.        

Democrats with spending plans face a quandary this 2024-25 budget year, which is tight.

Consider this: The "set-aside" — general fund dollars that pay for bills still working their way through the process — is only about $22 million, according to the budget narrative. About $3 million is already committed to sunset bills that reauthorize state programs.

However, the lawmakers' wish list for general fund dollars is about $500 million. That means lawmakers will have to find a way to cut the costs of their spending priorities or see them go by the wayside.

So, lawmakers are turning to tax credits, particularly tax credits that tap the state's TABOR surplus.

To Democrats who are pushing for what amounts to spending reallocation from taxpayers to specific programs, the change is needed because the state doesn't invest enough in crucial areas, and it's more effective to focus a bigger amount on a specific need, rather than disperse money in smaller quantities among the population.   

Critics, meanwhile, countered that doing so takes away money from Coloradans, particularly those who need them the most, in order to fund "special interest groups" preferred by lawmakers. 

At its core, the argument touches on the classic debate over whether it's best for government to spend people's money on specific priorities, under the assumption that it would produce the most benefit, or whether taxpayers should be able to keep — in this case get back — their dollars and spend it on their priorities.     

Rep. Steven Woodrow, D-Denver, insisted he doesn't see the tax credit bills as spending down the TABOR surplus.

"We chronically underinvest in this state" in areas such as infrastructure, education, and affordable housing," he told Colorado Politics recently. "TABOR requires us to find mechanisms that incentivize the conduct we're trying to promote. When we look at how we can accomplish the things we need to, tax credits are what we have to work with."

Woodrow said the question for lawmakers is whether those dollars should be returned to people in a "less-than-equitable" way or whether lawmakers can advance policy goals and investments.

That effort to tap TABOR began in earnest on April 8, with a committee passing the biggest of the 43 tax credit bills that remained alive.

And some in the lawmakers' wish list would spend big dollars. Two measures — one dealing with family tax credits and another for caregivers — could take more than $900 million out of the TABOR surplus for 2024-25, estimated at $2 billion.

Indeed, the wish lists for tax credit bills total $1.5 billion in 2024-25 and that amount will increase further in the years to come.

Lawmakers on both sides of the aisle are betting that taxpayers would be okay with giving up their TABOR refunds well into the future, should the majority of those measures pass, in order — they say — to provide funding for low-income families, seniors, health care and childcare workers, housing, the homeless and many others.

Sponsors: tax credit could slash child poverty rate in half

The House Finance Committee recently greenlighted House Bill 1311, the Family Affordability Tax Credit, sponsored by Reps. Chris deGruy Kennedy of Lakewood and Jenny Willford of Northglenn.

It would tap $655 million from the TABOR surplus in 2024-25. In following years, the tax credits will tap $695 million, specifically targeting the six-tiered sales tax refund that goes out to taxpayers when they file their taxes every year.

The legislative declaration for HB 1311, as amended, said Colorado is projected to have $2 billion in revenue over the TABOR limit and will continue to have similar amounts available in the future.

“At a time when these resources are available, it is imperative that the state distribute them in order to make the greatest impact on families and the economy," the bill said.

Despite having one of the fastest growing economies in the United States, Colorado is unaffordable for working families and more than 133,000 children are living in poverty, said deGruy Kennedy during the hearing on HB 1311.

Families need six-figure incomes to afford a median-priced home. Even for the cheapest one-bedroom apartment, at $1,364 per month, a worker would need to work 77 hours per week, he said.

Poverty in early childhood, deGruy Kennedy said, results in an increased risk of toxic stress that can disrupt brain development and increase the long-term cognitive risks over the course of a child's life. Eventually, that affects educational attainment, earnings, adult health, reliance on public benefits, and even arrest rates, he said.

Willford told the committee that the tax credit would put money into the hands of families with children under the age of 16: Up to $4,400 per child would be available for families with children aged five and younger, while families with children up to the age of 16 could receive up to $2,400 per child combined with existing tax credits, including earned income and child care tax credits.

“This initiative could slash our child poverty rate in half, making Colorado a beacon of hope and progress in the fight against childhood poverty,” Willford said.

She added that it’s not just about alleviating immediate financial burdens. The funds would “smooth” the transition for families moving off of public benefits and incentivize workers to pursue higher-paying jobs, which helps address the state’s workforce shortage.

DeGruy Kennedy said the bill’s structure addresses child poverty and helps families that aren’t below the poverty line — those that earn up to $95,000 in income for joint filers.

An individual with income below $25,000 would receive $3,200 per child for children under six years of age and about 75% of that amount for children between six years and under 17.

Kennedy acknowledged that, with the spending measures approved by lawmakers over the years, the TABOR surplus won’t last forever.

He noted the patchwork of spending lawmakers have adopted in recent years, such as providing money for school supplies, diapers and car seats.

DeGruy Kennedy said the fundamental problem is when a family lives below the poverty line. “No piecemeal support” solves the problems, he said, adding the tax credits would help families with housing and other expenses. He called the proposed spending a game changer.

HB 1311 does not have a sunset or repeal date, although as amended, it would depend on the state’s September revenue forecast and whether the surplus is sufficient to pay for it. In years when it’s not, that could mean a reduced benefit or possibly no benefit at all. DeGruy Kennedy said he is open to a sunset or repeal date.

Critic: 'Gob-stopping' price tag 

Rep. Lisa Frizell, R-Castle Rock, while calling the program’s price tag “gob-stopping,” argued that HB 1311 doesn’t help seniors who live below the poverty line and rely on the “meager” tax exemption they get for the senior property tax program. And that property tax program is only for seniors who own their own homes, not for renters.

(Another proposal, House Bill 1052, would create a housing tax credit for seniors who rent, taking $37.4 million from the TABOR surplus. The credit is not available to seniors who claim the homestead exemption but to seniors with an income below $70,000 per year, whether they rent or own a home.)

The next most significant tax credit bill is House Bill 1312, which would provide around $256 million per year in tax credits, also tapping the TABOR surplus, for someone working in the “care workforce.”

Under the bill, the tax credit would apply to a “child care worker, home health-care worker, personal care aide, certified nursing assistant, or other qualifying personal care worker including a family member, friend, and neighbor who provides care.”

Unlike HB 1311, the care worker bill sunsets in 2034 and requires the state auditor to measure the bill’s effectiveness.

Rep. Mary Young, D-Greeley — one of the sponsors of the bill that would divert $65.8 million in TABOR surplus dollars to reduce property tax-assessed values on the homes of seniors who had previously qualified for the homestead exemption but have since moved — said her measure continues the tradition of using those surplus dollars to fund this extension for seniors, who have relied on it for years.

All three likely meet the definition of “people-centered tax policies,” according to the Colorado Fiscal Institute. 

Esther Turcios, a deputy director with the Colorado Fiscal Institute who views taxation a "tool of oppression," said that lawmakers can't change the TABOR revenue cap, even for "worthy" programs, such as increasing teacher pay.

"We know that all folks are taxpayers, from the lowest to the highest incomes. The money going back is going to the same people who pay it, but should be done in more targeted ways," she said.

She also argued that workers' wages "have not kept up with the cost of living."

"If the TABOR surplus can be returned through targeted tax credits, that's the most people-centered way to do it," she said, adding people should start thinking about them as a "collective pot of funds that help."

She said the market hasn't fixed the wage problem, so depending on it to raise wages to livable levels isn't working. Trickle-down economics, which involves giving tax breaks to the wealthiest few, hasn't worked, either, she claimed. 

As to whether it "wealth redistribution," a criticism raised by opponents of using the TABOR surplus, Turcios said it's misleading because it gives the impression that those who would receive those dollars are not paying taxes themselves. They pay sales taxes, a regressive tax, in which people at the lowest income level pay a higher percentage of their income than those at the highest income level.

'How is that fair?'

During the past two years, taxpayers have received equalized TABOR refunds.

In 2022, the refund was $750 per individual or $1,500 for joint filers, and this year, it is $800 per individual and $1,600 per joint filer. The first refund was a check issued just before the general election, which the governor considered a political ploy to sway voters. This year’s refund will be applied to tax returns.

Before the 2022 refund, TABOR refunds were relatively small, when they existed.

During the hearing on HB 1311, Natalie Menten of the TABOR Foundation noted that refunds have totaled $11.7 billion over 30 years, most of which have been in the last few years.

Taxpayers have given up three times that amount for various state purposes, such as voter approval of Proposition 123 for affordable housing in 2022. That’s expected to tap $270 million annually from the TABOR surplus.

“How is that fair?” Menten asked during the HB 1311 hearing. “How is it fair that you continue to take money from somebody who's making a moderate income?”

Jon Caldara of the Independence Institute says the tax credits are a form of wealth redistribution.

"It's maddening," he told Colorado Politics.

"Let's keep in mind that candidate (and now governor) Jared Polis campaigned on ending special interest tax breaks and use that excess money to lower income taxes," Caldara said. Lawmakers "are sucking away that extra revenue so there will never be another income tax cut," he said.

If the governor wants to lower income taxes — a request he makes annually in his State of the State address, although he's never backed any proposals to do so in the General Assembly — he needs to end these tax breaks for special interests, even the "warm and fuzzy" ones, Caldara said. 

A white paper from the Independence Institute noted that in his 2020 State of the State, Polis said he was "enthusiastic about working to deliver permanent income tax relief, and we should continue down the path of eliminating tax breaks for special interests so that we can lower rates for everyone without reducing state revenue.”

Instead, the governor and the legislature have adopted more tax breaks, the white paper claimed, resulting in a $200 million smaller TABOR surplus for 2024-25, the Independence Institute said. 

Frizell, who sits on the finance committee, said spending down the surplus is a carve-out for special interest groups and taking money away from everyone.

"It shouldn't be directed to pet projects and special interest groups," she said.

"You have to look at how (the TABOR surplus) is being tapped" and for whom, she said. As for HB 1312, she said she finds it problematic since it's intended to "supplement income."

"This is a free market issue," Frizell said. "If we have a need for care workers, and nobody is disputing that, we need to pay them appropriately. It's not the role of the state to incentivize that behavior and those professions."

Diverting funding to these groups is not sustainable, she added.

And what happens when the surplus disappears?

That's the $2 billion question, Frizell said, adding she worries about imposing obligations on the state that may not be sustainable.

"It's our money. It's our citizens' money. If (the surplus) ends, we don't get our money back," she said, adding she also worries that the tax credits will create a sense of entitlement.

The big questions remain: How many of these tax credits will make it to the governor's desk? And which approach does he favor? Or does he prefer not tapping TABOR at all?